January 30, 2008

KLA-Tencor Settles

KLA-Tencor Corp. (NASDAQ: KLAC), a California-based provider of process controls and yield management solutions for the semiconductor and microelectronics industries, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Cal. The case, originally filed in June 2006, stems from allegations that KLA-Tencor failed to properly account for the stock options it granted its employees.

The settlement is for $65 million. For coverage of the earlier options-related settlement between KLA-Tencor and the SEC, see this New York Times article.

Posted by Lyle Roberts at 05:08 PM | TrackBack

January 28, 2008

PLI Briefing on Stoneridge

The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent Stoneridge decision. The webcast will take place on Thursday, January 31 at 1 p.m. ET and CLE credit is available. Click here to register.

Posted by Lyle Roberts at 11:38 PM | TrackBack

January 25, 2008

January 22, 2008

Enron Denied

The first impact of the Stoneridge decision has been felt. The U.S. Supreme Court issued an order today denying review of California Regents v. Merrill Lynch, the Enron-related case from the Fifth Circuit that raised similar scheme liability issues.

The Court also vacated and remanded a Ninth Circuit case on scheme liability, Avis Budget Group, Inc. v. Ca. State Teachers' Retirement, for further consideration in light of Stoneridge (see here for a summary of the Ninth Circuit opinion). Bloomberg and SCOTUSBlog have reports on the decisions.

Quote of note (Bloomberg): "The court's rejection of the Enron investor appeal came without any published dissent. The rebuff 'further confirms that there is no financial services exception' to the Stoneridge ruling, said [counsel for] the suppliers in last week's case."

Posted by Lyle Roberts at 02:30 PM | TrackBack

January 17, 2008

On The Other Hand

As it turns out, trials remain a risky business for both plaintiffs and defendants. Any thoughts that the JDS Uniphase defense verdict would lead to more securities class action trials will have to be tempered by yesterday's result in the Apollo Group trial. Bloomberg reports that the jury returned a plaintiff verdict that could lead to a payout of up to $277.5 million in damages.

Interestingly, the company has a web page on the litigation that includes a case summary, key documents, and a timeline of events. Comprehensive coverage of the trial and the jury verdict can be found at Securities Litigation Watch and The D&O Diary.

Posted by Lyle Roberts at 06:29 PM | TrackBack

January 15, 2008

Stoneridge Decided

In the Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (a.k.a. Charter Communications) case, the U.S. Supreme Court has held that the implied private right of action under Sec. 10(b) for securities fraud does not extend to third parties who neither make alleged misstatements nor engage in deceptive conduct on which investors relied. The 5-3 decision (Justice Breyer did not participate) authored by Justice Kennedy resolves a circuit split over the scope of "scheme liability."

In Stoneridge, the plaintiffs alleged that Charter and two of its suppliers and customers, Scientific-Atlanta and Motorola, knowingly engaged in a business scheme that allowed Charter to artificially inflate its reported revenues and operating cash flow. The plaintiffs sought to hold Scientific-Atlanta and Motorola primarily liable for the misstatements contained in Charter's financial statements. The district court, with an affirmance from the U.S. Court of Appeals for the Eighth Circuit, dismissed these claims. On the issue of scheme liability, the Eighth Circuit found that Scientific-Atlanta and Motorola had not participated in the making of the misstatements and "any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under Sec. 10(b) or any subpart of Rule 10b-5."

On appeal, the Supreme Court took a notably different approach. The Court rejected the Eighth Circuit's decision to the extent that it could be "read to suggest there must be a specific oral or written statement before there could be liability under Sec. 10(b) or Rule 10b-5." The Court found that "[c]onduct itself can be deceptive" and provide the basis for liability. Instead, the Court focused on whether the Charter investors could be said to have relied upon the deceptive acts of Scientific-Atlanta and Motorola in purchasing their securities.

The Court concluded that there was no basis for finding that the investors could be presumed to have relied upon the relevant deceptive acts. First, Scientific-Atlanta and Motorola had no duty to disclose their conduct to Charter's investors. Second, the fraud-on-the-market doctrine was inapplicable because the conduct was "not communicated to the public." Accordingly, the Court held that the investors could not "show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability."

The rest of the opinion is devoted to various legal and policy defenses of this limitation on the scope of scheme liability. The Court noted that Charter's investors were seeking to apply Section 10(b) "beyond the securities markets - the realm of financing business - to purchase and supply contracts - the realm of ordinary business operations." To do so would "invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees." Moreover, adopting the position advocated by Charter's investors would "revive in substance the implied cause of action against all aiders and abettors except those who committed no deceptive act in the process of facilitating the fraud" and would undermine Congress' determination in the PSLRA that this "class of defendants should be pursued by the SEC and not by private litigants." Finally, the Court expressed concern that "scheme liability" would "raise the cost of being a publicly traded company" and "shift securities offerings away from domestic capital markets."

Holding: Affirmed.

Notes on the Decision

(1) The Court adhered closely to the argument made by the Department of Justice in its amicus brief. Although some commentators predicted that outcome, the Court's focus on reliance is interesting given that Chief Justice Roberts (who joined the majority opinion) expressed skepticism at oral argument over whether the issue was properly before the Court. The dissent (Stevens, J.) agreed that the issue was not ripe and suggested that "the fairest course to petitioner would be for the majority to remand to the Court of Appeals to determine whether petitioner properly alleged reliance, under a correct view of what Section 10(b) covers."

(2) While the media is likely to trumpet the decision as a victory for corporate defendants, it is important to note that the victory was not as sweeping as it could have been. Contrary to the holdings of both the Eighth Circuit and the Fifth Circuit (see here), the Court held that deceptive conduct, even without the existence of an oral or written misstatement, can provide the basis for securities fraud liability if the plaintiffs can establish that they relied on that conduct. Indeed, many courts have defined the distinction between "aider and abettor" and "primary violator" by reference to the level of participation of the individual defendant in making the misstatement at issue and whether the public became aware of the defendant's alleged involvement. Does Stoneridge open the door to a broader view of "participation"?

(3) The Court's references to the possible deterrence of overseas firms from doing business in this country and the shifting of "securities offerings away from domestic capital markets" are going to draw criticism as being excessively policy oriented (see here for an early example).

(4) In support of its holding that the investors could not establish reliance, the Court repeatedly cited the investors' lack of knowledge about the "deceptive acts" in which Scientific-Atlanta and Motorola were alleged to have engaged. Presumably the Court was referring to the failure of the investors to allege that they were aware of the transactions between the companies and Charter, not to a lack of knowledge that the transactions were deceptive. Nevertheless, it struck a discordant note when the Court stated, for example, that the defendants' "deceptive acts were not communicated to the public." If the deceptive acts had been communicated to the public, of course, the defendants would have had a completely different lack of reliance defense.

Posted by Lyle Roberts at 10:43 PM | TrackBack

January 10, 2008

Around The Web

Two items of interest:

(1) Texas billionaire Sam Wyly's litigation over the settlement in the Computer Associates securities class action has hit a slight bump. The court decision giving Wyly access to the work product of the lead counsel in the Computer Associates case has been on appeal in New York state court. The New York Law Journal reports that the appellate court has overruled the earlier decision, finding that an absent class member does not have the same right to lawyers' files as a client in a traditional attorney-client relationship. Wyly's attorney states that Wyly plans to appeal the decision and, in any event, will be able to obtain the material as part of his ongoing legal malpractice suit against the plaintiffs' firms.

(2) Was the JDS Uniphase case a harbinger of success for defendants in securities class action trials? We should know soon. According to Securities Litigation Watch, a verdict in the Apollo Group trial could be reached today.

Posted by Lyle Roberts at 09:02 AM | TrackBack

January 08, 2008

Cornerstone And Stanford Release Report On Filings In 2007

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2007. The findings include:

(1) There were 166 filings in 2007 (as of 12/17/07). Note that there is a significant difference between the Cornerstone (166) and NERA (198) totals over the same time period. Both numbers, however, represent a large increase over the number of filings in 2006.

(2) The report is skeptical that the increase in filings suggests a trend back to historical filing levels, noting that 32 of the filings were related to the subprime crisis. Increased stock market volatility in the second half of 2007 also may have played a role in the increase.

(3) Because of subprime-related litigation, filing activity in the financial sector nearly quadrupled to 47 filings (as compared to 11 filings in 2006).

(4) The report examines the outcome of post-PSLRA cases in Cornerstone's database (2,646 cases). The report finds that of the resolved cases, 41 percent were dismissed and 59 percent settled.

The press release announcing the issuance of the report can be found here. The D&O Diary has an interesting post breaking down the 2007 statistics and challenging some of the report's conclusions.

Quote of note (press release): "Professor Grundfest commented that 'the JDS trial is an important landmark in modern securities litigation. These cases rarely go to trial, and for the defendants to win a total victory in a case that claimed $20 billion in damages demonstrates that not every case that makes it past summary judgment has merit. The interesting question is how and whether this trial result might cause plaintiffs to modulate their settlement demands or embolden defendants to take cases to trial.'"

Posted by Lyle Roberts at 06:19 PM | TrackBack

January 04, 2008

Deloitte & Touche Settles Delphi-Related Claims

Deloitte & Touche LLP, an auditing firm, has announced the preliminary settlement of the claims brought against it in the Delphi securities class action (E.D. Mich.). The case, originally filed in 2005, stems from Delphi's financial restatement and subsequent bankruptcy.

Deloitte's settlement is for $38.25 million. The settlement follows on the heels of Delphi's related $342 million settlement announced last September. Reuters has an article.

Posted by Lyle Roberts at 04:33 PM | TrackBack